Market defying laws of gravity

AS THE Hang Seng Index approaches the 8,000 level, investors would be excused for thinking the Hong Kong stock market is a little too hot to handle. Indeed, at the beginning of summer, few predicted the index would reach current levels; a slow summer sell-off seemed far more likely.

While there are words of caution around the industry, the underlying sentiment seems to be bullish. Perhaps, it is worth buying on any signs of weakness.

Yet, the market seems to be defying the laws of gravity. The concerns which caused a stock sell-off at the end of last year still remain. China and Britain have yet to sort out their differences over Hong Kong's political future.

In addition, major infrastructure projects, such as the new airport and Container Terminal 9, remain as uncertain today as they were this time last year.

On top of these familiar problems, there are new spectres haunting the market. It still looks possible that China's runaway economic growth could defy attempts to rein it in.

While there have been positive signs - for example, the stabilisation of the exchange rates and the growth in deposits - the latest inflation figures show that China's economy is not out of the woods yet.

And as for China's paramount leader, Deng Xiaoping, has anybody seen him recently? Nevertheless, there is the feeling you could go away for three weeks' time and come back to see the Hang Seng Index at 8,000.

There are sound reasons for the strength in the market. Taken alone, Hong Kong stocks look good buys. The fundamentals should not be ignored. On a historical basis, the Hong Kong market remains reasonably valued.

We have seen 16 per cent corporate earnings growth this year, and many expect 17 per cent next. On basis of this, the Hang Seng Index should be at 8,000 by, at the latest, the first quarter of next year.

In addition, with low interest rates resulting from the link between the Hong Kong currency and the US dollar, the territory is enjoying conditions that stimulate economic growth.

And, as for the ordinary punter, it is not worth putting money in the bank when some deposit accounts pay as little as one per cent returns. The movement in the price of a second-line stock can provide that return in a day.

So, the stock market provides one way of keeping ahead of inflation, albeit a slightly risky one. For this reason, domestic liquidity on the market has been very noticeable as daily turnover usually remains close to $5 billion.

Hong Kong companies are also likely to enjoy the benefits of growth in its major markets as order books fill, and the local stock market has certainly attracted a growing amount of institutional funds anxious to make a play on growth in both China and the region.

But the interim results, still to come, all look likely to please analysts. Chinese money is said to be coming back to the market, and there is no predicting investor perception; 8,000, here we come?